KEY TAKEAWAY:
--The rapid surge in litigation exposure has rendered the term "nuclear verdicts" --typically those exceeding $1 million — obsolete, with "thermonuclear verdicts," exceeding $10 million, emerging as the new benchmark.
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Litigation stands as the foremost challenge within the P&C industry. From 2018 to 2023, litigation management costs for the combined P&C sector surged 19%. As detailed in AM Best Financial reports, this escalation is reflected in an approximate $24 billion loss adjustment expense (LAE). According to alternate assessments, the top 50 carriers in the U.S. individually allocated an average of $500 million toward litigation expenses. If we conservatively estimate that litigation expenses represent only a quarter of the total litigation spending, accounting for expense and indemnity, the industry is funneling approximately $100 billion annually through its litigation departments.
However, litigation experts contend that the true extent of litigation challenges has yet to fully manifest. A prominent trade organization has identified combatting legal system abuse as the primary focus for the P&C sector in 2024. In many markets, lawyers have emerged as the dominant advertisers, often yielding substantial rewards in nuclear verdicts, which have now escalated to thermonuclear proportions. The rapid surge in litigation exposure has rendered the term "nuclear verdicts" --typically those exceeding $1 million — obsolete, with "thermonuclear verdicts," exceeding $10 million, emerging as the new benchmark. The consequences of unfettered litigation are exemplified by events such as the world's largest personal injury firm filing an astonishing 25,000 lawsuits in a single week in 2023.
Big tech and Wall Street have taken notice. One software company raised $50 million to use AI to draft demand letters for plaintiffs’ attorneys, and business is so good that one $30 billion technology investment fund just purchased another litigation tech company. Wall Street is deploying hundreds of millions of dollars to remove any obstacles to plaintiff attorneys acquiring as many claimants as possible.
If this continues through 2024, insurers could pump an additional $40 billion directly to their courtroom opponent – plaintiffs’ personal injury attorneys.
What’s next? What’s at stake?
See also: Attorney Involvement Keeps Claims Soaring
Insurance Litigation Today: A System Poised for Disruption
Over the past decade, insurers have increasingly delegated litigation responsibilities, first to attorneys and subsequently to external bill reviewers. The introduction of bill reviewers has since shaped today's industry standard, emphasizing the measurement of adjusters and law firms based on expense rather than value.
While insurers and insurance defense attorneys have grappled with the challenges posed by bill reviews for years, viable alternatives have only recently emerged. At the heart of this issue lies the need for a universally accepted standard for assessing value, with insurers predominantly focusing on cost metrics. Initially, bill reviewers provided a valuable service by scrutinizing expenses, yet insurers have failed to progress to the critical stage of controlling actual outcomes, particularly settlements.
Meanwhile, plaintiffs’ attorneys measure their value by one thing and one thing only: their bank accounts. Plaintiffs’ attorneys are typically paid a percentage of the settlements they obtain.
After decades of rising litigation expenses and little innovation, insurers named this dynamic social inflation. Insurers were able to predict the decreasing performance well enough to stay profitable. So long as insurers could predict the decline in claims litigation and insurance defense quality, they could price it into the premium.
But this incentive structure is powerful enough to end an insurance market – even before the ensuing exponential impact of litigation finance and AI. Over time, plaintiffs’ attorneys push settlements higher and higher and higher. They take 40% of the settlement and reinvest those settlements into more advertising.
Next, plaintiffs’ attorneys leverage the increased income to invest in staff to prolong litigation instead of settling. Armed with an increasing amount of money and people, insurers reinforce this behavior by paying more and more, especially on the courtroom steps. Left unchecked, insurance becomes unaffordable or unavailable, as evidenced by the Florida property market. By the time legislators try to fix everything, the markets could be gone forever.
Within the four walls of a claims litigation department or law firm, you can see with your own eyes how litigation became such a drain on the industry. Defense attorneys are paid by the hour to send emails to adjusters, and adjusters have to copy and paste those emails into claims systems to satisfy regular quality audits.
The average adjuster routinely prioritizes work by email. The insurance defense attorney is paid the same hourly rate, whether productive or passive. For defense attorneys who go rogue and try to win, the external bill reviewers delete significant portions of their income.
As a result, the average insurance defense attorney and plaintiff attorney often do not even begin exchanging serious settlement offers until after a substantial expense is incurred. Insurers typically can use billing data to watch this happen but do not have any other data or tools to control it. Ultimately, some event forces the attorneys to prioritize the case, and they call each other and settle … finally.
Insurance Litigation Tomorrow: Starting With Simplification
In 2023, the national P&C industry was compelled to confront the unfolding situation in Florida, which served as a harbinger of broader challenges emerging nationwide. This prompted a decisive response, with insurers initially turning to AI and predictive analytics to address the burgeoning crisis. However, they swiftly realized that such technological solutions were not the immediate panacea.
The unique nature of litigation, wherein insurers navigate a complex network of numerous lawyers from diverse law firms, with plaintiffs' attorneys often holding sway as the ultimate decision-makers, posed a formidable obstacle to innovation. Any transformative efforts needed to be rooted within the existing system, focusing on optimization from within.
See also: Role of NLP in Claims Management
While the innovation opportunities are complex from a people standpoint, they tend to be simple from a process standpoint:
- Basic Data Standards: Insurers needed a standardized, best-practices data set. They needed to understand the elements of a case that generate case progress or help define case value. They also required a clear expectation of what data points make up a case, what data points require further evaluation and when that evaluation should be complete. Insurers needed to leverage these basic standards to start workflow simplification, automation (including integrations) and prioritization.
- Workflow Simplification: Insurers needed to review their data to see which activities drove reduced exposure and which added exposure. Insurers needed to stop the legal tasks that added expense but did not affect resolution.
- Workflow Automation: Adjusters and attorneys are initially trained to be helpful at strategic work but are often saddled with inefficient administrative work. Insurers needed to shift them to making decisions, not setting reminders and summarizing emails. They also needed to leverage litigation automation tools to help adjusters and attorneys automatically move cases along.
- Settlement Optimization: Insurers needed to identify which cases could be settled and ensure the best resources prioritized that essential activity. Insurers needed to deprioritize cases that were not ripe for settlement.
- Integrations: Claims litigation departments needed to learn how to automatically get information out of claims systems and to law firms, and vice versa. Claims litigation departments needed to work seamlessly with their attorneys rather than interacting with them only through invoice reductions.
- Management Engagement and Prioritization: Claims litigation departments needed to explain to management why litigation was so expensive and how investment in it could yield value.
- Halt to Legal System Abuse: Insurers needed to make social inflation more than an idea. They were required to show regulators the litigation cost drivers and the impact on policyholders and commerce.
- Rewards for the Winners: Insurers needed to see which adjusters and attorneys obtained the best results and which needed additional training. Insurers needed to show adjusters and attorneys they cared about this problem and prevent them from taking their talents to the plaintiffs’ side.
The Industry Tipping Point: Will P&C Stop Legal System Abuse Before It's Too Late?
Insurance typically undergoes incremental change, not rapid transformation. Yet insurers now find themselves directly confronting the plaintiffs' bar in courtrooms, bolstered by support from Big Tech and Wall Street.
This litigation tipping point isn't your typical insurance issue. While inertia might lead insurers to attempt to predict this crisis rather than prevent it, this level of change isn't easily foreseeable.
Fortunately, insurers confront this challenge in the age of cloud technology. Core systems providers have equipped them with the necessary tools to combat legal system abuse should they choose to do so.
